Sunday, September 30, 2007

THE PUNITIVE EFFECTS OF PUNITIVE CORPORATE TAX CODE

There is innumerable evidence showing that high corporate tax burden is eroding competitiveness and results in a poor track on investment, growth and job creation. As every economist agrees upon, there is hardly any upward change in output without a rigorous pro-growth economic policy and supply-side feedback.

Instead of the so called aggregate demand, the output growth has been shown to be driven by the long-run engines of growth such as saving, investment, entrepreneurship, innovation and labor supply known as human capital or productive behavior.

The stimulation of output growth through the infusion of expansionary public and fiscal spending has several negative effects such as inflationary pressures, unless the output gap is negative.

Despite thousands of pages of a negative impact of high corporate tax burden on growth and labor market, the politicians obviously haven't yet learned a simple "elementary-school" lesson called the Laffer curve, stating that high tax rate on corporate income has a double negative feedback.

First, the punitive tax rate enables a the outburst of complexity leading to costly evasion and comparably associated administrative cost, such as the education incentive for under-productive jobs that entail a minimum or zero-contribution rate to output growth and instead, hamper growth potentials of firms, forcing them to face higher proportion of additional labor cost that otherwise has enviable and nevertheless attractive alternative investment choice.

And second, the course of economic and tax policy has shown that high tax rates correlate with tax revenue loss (because of high taxes), leading to continually high and unrestrained public spending and external fiscal indebtedness.

As a recent example from Ontario straightly demonstrates, when the output performance is shifting the economy from manufacturing to a reliance on knowledge-intensive services, the labor demand is oriented towards highly productive human capital. One of such areas is the financial sector.

As the economy structurally transforms, the role of financial service sector plays continually nevertheless important role that is essential in boosting the sector's contribution to output growth.

Last year, the sector generated 7.8 per cent of Ontario's total gross domestic product or $36 billion. For Toronto, it contributed an estimated 14.3 per cent or $15 billion of the city's economy.

On the other side, Ontario currently stands at a punitive corporate tax code that is eroding macro and micro-competitiveness. In spite of 14 percent capital tax rate, Federal rate of capital taxation is onerous and one of the highest in the world, undermining the output growth respectively.

The evidence of capital tax as a job-killing one is very to understand. Imagine that you're a corporate manager in Toronto facing a punitive corporate tax code and considering the switch to investment-friendlier territory:""... if Alberta, for example, completely abolished its corporate taxes, you know it's going to be not too long before a lot of financial services and other kinds of companies may well say `Well look, for the sake of what could be hundreds of millions of dollars in tax, might we have to consider moving our head offices'?" (link)

Stronger investment environment that supports growth could hardly be recognized as that if high tax burden, red-tape, compliance regulation and administrative barriers reduce competitive potentials of the territorial economy to create jobs, increase productivity and output.